Unclear GST rules blindside Indian businesses

New Delhi, July 27, 2017

The Goods and Services Tax was meant to unify the $2 trillion economy and make it easier for companies to transact across state borders. Nearly a month on, many are finding that doing business is more complicated than ever.

Ambiguous rules under the new multi-rate GST tax that went into effect on July 1 have left firms confused on how to price their products. The tax’s complex structure — four main rates ranging from 5 to 28 per cent — has hurt sales and risks denting economic growth and government revenues in the months ahead.

Pricing products

Airlines, for example, are uncertain whether to tax premium economy seats as economy or business class - at rates of 5 per cent or 12 per cent, respectively. Auto repair shops face a similar quandary as GST rates vary for different jobs. “People are either overcharging or undercharging for their work,” said Surinder Paul, who runs one workshop in South Delhi.

Even computer maker HP Inc, which is marketing a laptop product to help small businesses comply with the new tax, is seeking clarity. Under the GST, desktops and laptops are taxed at 18 per cent, while multi-function printers and monitors attract a 28 per cent charge. “Monitors, CPUs and other parts of a computer are imported as a single unit. What rate do we charge - 18 or 28 per cent?,” asked Poonam Madan, a tax official at HP.

Billed as India's biggest tax reform since independence in 1947, the GST has replaced more than a dozen federal and state levies and was meant to unify the country into a single market. While teething troubles were expected, the ensuing chaos has some officials worrying about the repercussions for Asia's third-largest economy. The annual growth slowed in the January-March quarter to 6.1 per cent, its weakest pace in more than two years. If growth slows further, federal finances would face pressure. A big test will come in September, when a grace period on filing complete monthly GST returns ends.

A survey by tax software provider Tally Solutions found that more than 40 per cent of small businesses were still not up to speed on how the GST works and two-thirds hadn't yet installed compliance software.

Tax crash course

New Delhi has launched an active outreach programme to educate companies and explain different provisions of the new tax. This exercise has also become a crash course for tax officials in the anomalies of the new tax structure.

Officials have discovered that holiday tour operators are charging the new tax not only for services provided in India but also for those offered abroad. While vegetable seeds remain tax exempt, paddy, cereal and corn seeds now attract 5 per cent tax. This has hit sales at companies such as Monsanto, whose local seed merchants have no experience of paying tax. “Our sales are getting hammered at a time when they would normally be booming,” Arindam Lahiri, Monsanto's taxation lead in Asia & Africa, told Reuters. “This anomaly needs to be fixed urgently.”

Revenue Secretary Hasmukh Adhia, overseeing the GST rollout, tweeted this week that nearly 8 million businesses were enrolled to pay the tax and the transition “is going on smoothly". He did not respond to a request for comment.

Tobacco stocks slump

However, for some companies it has been anything but smooth. Tobacco firms such as ITC Ltd were blindsided by further rule changes after the GST went into effect. These firms lost more than $7 billion in stock market value last week after the government suddenly hiked cigarette taxes. This hike was because the government believed that the GST had unintentionally handed tobacco companies a windfall profit.

Adding to the pain, a couple of Indian states raised local taxes or imposed new levies to challenge Prime Minister Narendra Modi's 'one nation, one tax' mantra.

The GST was originally expected to boost India's economic growth by as much as 2 percentage points. But a convoluted structure has made many economists mark down their expectations. If anything, growth dividends are expected to accrue only over time and not even the government's chief economic adviser, Arvind Subramanian, is daring to estimate its near-term impact. In a note, analysts at Jefferies believe that the “GST in its current form fails to harmonise tax rates across products or enhance ease of doing business significantly”.